Our Dickensian economy: Has our country become mean-spirited?

An insightful article by Alan Blinder, professor of economics and public affairs at Princeton University, in the Wall Street Journal this morning describes the symptoms of the dire disease afflicting the US economy. Think about this:

“Real average hourly earnings (excluding fringe benefits) now stand roughly at 1974 levels. Yes, that's right, no real increase in over 35 years. That is an astounding, dismaying and profoundly ahistorical development. The American story for two centuries was one of real wages advancing more or less in line with productivity. But not lately. Since 1978, productivity in the nonfarm business sector is up 86%, but real compensation per hour (which includes fringe benefits) is up just 37%. Does that seem fair?”

“Jobs. Our biggest problem today is the shortage of jobs. Payroll employment fell an astonishing 8.4 million from its December 2007 peak to its December 2009 trough and has gained back less than a million of those jobs so far. With the working-age population increasing by almost 8 million over that period, the unemployed today number almost 15 million.”

“There is a pattern here. Those of us who live near the top of the income pyramid are doing very nicely, thank you. Yet our government keeps showering us with Christmas presents. Meanwhile, economic life is pretty miserable for those near the bottom and is getting worse for those in the middle. Does this strike you as fair?”

What’s important is to understand why this has happened. Is it because the country has become mean-spirited and the rich have become greedy and able to manipulate Congress. That’s certainly the interpretation that the Left often puts on things and what Blinder implies. But it isn’t particularly plausible or helpful. Even if it were true, it doesn’t lead to any possible remedy. In any event, it isn’t true.

The disease behind the symptoms

The real reasons lie deeper. The fundamental problem is that the private sector is not as productive as it used to be. The statistics demonstrating this are now well known, as disseminated by Deloitte’s Center for the Edge and the Kauffman Foundation:

•             The rate of return on assets of US firm is one quarter of what it was in 1965,

•             The life expectancy of a firm in the Fortune 500 has fallen to 15 years and continues to decline.

•             Only one of five workers is fully engaged in his or her work. The larger the firm, the less the engagement. This is not just a matter of job satisfaction: in a world where motivation is a key to productivity, engagement is a key determinant of productivity.

•             Established organizations between 1980 and 2005 produced no new net jobs for the US economy.

•            The gains in productivity have largely been achieved through cost-cutting, downsizing and shipping jobs overseas, while top talent has been able to claim a larger share than before.

•           In effect, there are two types of productivity gains. One is achieved by getting greater outputs from the same inputs. The other is achieved by getting the same outputs from fewer inputs. The gains in productivity of US organizations have come mainly from the latter, not the former. Economists often fail to distinguish the two types of productivity gains, because they are only looking at the numbers and the ratios. But the difference between the two is vast in terms of its impact on employment and human misery.

As a result, the economy, particularly the private sector, is no longer providing a good living for all its citizens. That is the crux of the matter. The pie isn’t growing fast large enough to accommodate gains for everyone. Once the rich and powerful take their cut, there’s nothing left for those in the middle or the bottom.

This economic decline is not a short-term blip that has occurred as a result of the financial meltdown. These are long-term trends that have continued for over fifty years through both Democrat and Republican administrations. The trends are deep. And they are real.

The root causes of the disease

These problems have not arisen because the private sector has forgotten how to manage. These problems have arisen because the economy has changed in fundamental ways while the way we are managing our organizations hasn’t.

Two epochal shifts are responsible. One is the massive shift in the balance of power from seller to buyer, which imply that our organizations must be more responsive to the needs of the marketplace. The other is the shift in the nature of work from semi-skilled work to knowledge work. These two massive shifts mean that the hierarchical bureaucracies that were so successful fifty years ago can no longer prosper for long in today’s world. We have to run our institutions differently if we are to be successful in the 21^st Century.

The solution: radically different management

The good news is that some organizations have figured out how to run their organizations in a radically different way and get better results. A whole array of books have been published that describe what’s involved. I’ve synthesized what these books are saying in my article, The Death—And Reinvention—of Management. Or you can read the books themselves, such as  The Power of Pull by John Hagel, John Seely Brown and Lang Davison, or Reorganize for Resilience by Ranjay Gulati or my own book, The Leader's Guide to Radical Management: Reinventing the Workplace for the 21st Century.

Comments

[Tsidjs]

I agree with the thrust of your post but I think you're underestimating the degree to which managers have utilized low- or no-skill labor over the period of the last 35 years.

I have personally had the experience of pitching a technology solution with a strong business argument to a major bank. Top management at the bank's response was that it was their corporate strategy to prefer solutions for which minimum wage could be paid. When you combine such a strategy with de facto open borders and off-shoring that it should depress wages in the U. S. for all but a handful shouldn't be particularly surprising.

[Steve Denning]

Tsidjs,

I agree. Solutions where you pay the minimum wage enable firms to continue with top-down command and control management. Only problem: as a strategy, it leads to the disaster we see in the Shift Index statistics.

Steve

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our country become mean-spirited? always more kind people